Cbdmd, Inc. annual report, FY2019

Business context and reporting period

cbdMD, Inc. sells CBD products under the cbdMD and Paw CBD brands through e-commerce and wholesale channels. This filing is a Form 10-K for the fiscal year ended September 30, 2020, filed December 22, 2020; the request metadata’s “2019 Q4” does not match the filing period. Fiscal 2019 comparisons reflect continuing operations, primarily the CBD business, after four other subsidiaries were discontinued.

Financial performance and position

Sales increased about 77% year over year. E-commerce represented 72.7% of sales, up from 62.5%; wholesale represented 27.3%. Paw CBD sales were $4.49 million, compared with $1.93 million. Cost of sales was 37.0% of sales, versus 38.6%, though fourth-quarter gross margin fell to 54.4% from 56.7%.

The reported FY2020 net profit does not indicate profitable core operations: the company recorded a $29.78 million non-cash gain from remeasurement of contingent earnout liabilities, while continuing to report a $17.58 million operating loss. FY2019 included a $32.46 million non-cash earnout remeasurement expense. The filing reports no common dividends; the 8% Series A preferred stock has cumulative monthly dividends.

Total liabilities were $31.66 million, including a $1.46 million PPP loan and lease liabilities of $7.17 million. The PPP loan is subject to forgiveness review; if not forgiven, the filing lists repayments of $854,000 in FY2021 and $602,100 in FY2022. Cash increased mainly through financing: financing activities provided $22.37 million, including stock offerings and the PPP loan. The company reported no capital-expenditure commitments.

Material changes versus the prior comparable period

• Revenue and gross profit grew substantially, and gross margin improved modestly for the year; operating expenses rose 49.9% as the business expanded staffing, marketing and infrastructure.
• Operating cash outflow improved by $4.71 million but remained significant. Cash and working capital increased, while current liabilities more than doubled year over year.
• FY2020 common shares outstanding rose to 52.13 million from 27.72 million. The increase includes offerings, acquisition-related shares and other issuances.
• COVID-19 weakened brick-and-mortar wholesale sales, particularly in the third quarter; e-commerce growth offset the decline. Fourth-quarter wholesale sales rose sequentially but remained 28.4% below the prior-year quarter.

Outlook, risks, contingencies and unusual items

• Management expects cost of sales to remain in a 30%–37% range and is targeting positive operating cash flow, but gives no quantified revenue or profit guidance. Management hopes wholesale growth will recover as conditions improve.
• Planned fiscal 2021 launches include CBD skin care and water-soluble products; Paw CBD subscription and rewards programs were also anticipated. The company was preparing UK Novel Foods submissions and monitoring possible U.S. FDA regulatory changes.
• COVID-19 impacts remain uncertain. Other significant risks include evolving CBD regulation, dependence on third-party suppliers and manufacturers, product testing and compliance, and the company’s history of operating losses.
• Potential dilution includes up to 10.12 million additional earnout shares; the filing also identifies shares underlying outstanding options, warrants and convertible preferred stock. The earnout liability was valued at $16.2 million at year-end and is remeasured quarterly, affecting reported earnings.
• Unusual FY2020 items include approximately $1.70 million of inventory write-offs, a $489,381 severance expense, and $760,000 of investment-security impairment. The fourth quarter included a $1.663 million inventory charge.
• Pending matters include a CBD product labeling and advertising class action and a customer-data breach class action. The company says it intends to defend both. The total financial impact of the disclosed security incident was unknown.
• After year-end, the company raised approximately $15.7 million net from a December 2020 preferred-stock offering. It also reported $16.9 million net proceeds from a January 2020 common-stock offering during the fiscal year.

Important facts for investors to verify

• Reconcile the reported net profit with the operating loss and the non-cash earnout remeasurement gain; assess recurring profitability and cash burn.
• Check subsequent cash use, operating cash flow and whether the company reaches its positive-cash-flow objective.
• Confirm PPP loan forgiveness status, preferred dividend payments, lease commitments and other financing obligations.
• Track earnout milestones and potential share issuance, plus dilution from preferred conversion, warrants, options and subsequent offerings.
• Monitor COVID-19 effects on wholesale recovery, customer acquisition costs and e-commerce growth, as well as the stated gross-margin range.
• Follow regulatory developments and the status, potential costs and outcomes of the product-labeling and data-breach lawsuits.